Europe's Evolving Logistics Landscape

The advent of the European Union is dramatically changing logistics and supply chain management in the Old World.

From national to regional to pan-European—and now once again moving closer to the customer—many companies' European logistics networks have evolved in response to the advent of the Common Market.

Companies "are rethinking their distribution strategies in Europe," and revisiting their distribution networks, observes Jon Bumstead. Based in London, Bumstead is the partner responsible for Accenture's fulfillment practice in the supply chain. He sees "a greater move to internationalization, with companies sourcing products from farther afield and supplying products more centrally."

The evolution of European supply chains has been occurring for decades. In fact, many companies are in the third phase of a multi-phase model, according to Martin Gouda, senior consultant of Buck Consultants International, Nijmegen, the Netherlands.

The phases are:

Pre-1993. Before the European Union was established, "many companies had a national setup, with a distribution center in all the major countries in which they played," Gouda explains. Sourcing was done mainly from manufacturing plants in Europe, and logistics strategy was developed on a country-by-country basis.

"Logistics responsibility was national—there was often no real European strategy," Gouda explains. Supply chain service offerings were often one-size-fits-all. Transportation was performed by domestic carriers; third-party logistics providers were often local or regional in nature.

Mid- to late-1990s. When the European Union started to open its internal borders, "global sourcing became more important, and factories more globally focused," according to Gouda. The responsibility for logistics became more European focused, and companies developed strategies for European supply chain management.

Pan-European distribution centers began serving all the major countries of Europe. These DCs expanded their roles, postponing manufacturing and adding value-added activities to the traditional activities of receive, pick, and ship. Pan-European surface carriers came on the scene. In addition, companies increasingly turned their transportation needs over to integrators who could ship directly from a central location.

The situation today. Using centralized, pan-European distribution networks requires shipping products greater distances to customers, which can be costly in terms of money and time. As a result, supply chains in Europe are evolving again to become more product- and channel-specific, according to Gouda.

Companies today are using a hybrid of centralized and decentralized distribution facilities—for example, utilizing a centralized DC for medium and slow-moving products and shipping fast-moving products from a regional DC or what Gouda calls a rapid fulfillment center (RFC) that's based closer to customers. With this model, some products may bypass the DC altogether and be drop-shipped directly to the customer.

The regional DC that's part of the hybrid network is a different breed than the national facility of yesteryear, Gouda remarks. Today, a rapid fulfillment center, which might be as small as a cupboard in Madrid holding 80 key components, could carry A-type spare parts and products from a certain product family that are sold on a next-day or same-day delivery basis. B and C products could be shipped from a central distribution center.

Traditional distribution center sites are also evolving. Perhaps two-thirds of European Distribution Centers (EDCs) were historically sited in the southeastern part of England and the Benelux area (Belgium, the Netherlands, and Luxembourg), according to Bumstead. Today, EDCs are increasingly located in northern France and the western part of Germany.

And, to provide the fast service that's required today, regional distribution centers are being opened in a variety of locations. For example, an RDC in Lyon, France, might serve customers in southern France, Italy and Spain.

Whatever shape a company's European distribution model takes, one thing is for sure: "it is not one-size-fits-all anymore," Gouda says. Supply chains across the continent are being designed to respond to varying customer and product service level requirements.

Moving East

The manufacturing center of gravity has been moving southwards in Europe to Spain and Italy, and "is now moving east as companies chase lower labor costs," Bumstead notes.

"A lot of manufacturing formerly located in the U.K. and in established European countries has shifted into Eastern Europe," Gouda says. As a result, "Eastern Europe is becoming significant for inbound transportation," and logistics platforms to support the manufacturing facilities are beginning to open up.

The shift east is likely to continue, according to Bumstead, who predicts that "it's just a matter of time before the Eastern European countries are admitted into the European Union."

Countries such as Slovenia, Hungary, and the Czech Republic are well-positioned for the future. "If the traditional power base—Germany, France, and the U.K.—want to stay ahead of the logistics game, they"ll have to continue to innovate," Bumstead observes. "Otherwise, the game will go to the mid-east" countries of Europe.

Companies operating in Europe have to weigh the tradeoffs. Eastern Europe's lower labor costs may be offset by such things as less-developed transportation and telecommunications infrastructures. Other major changes are underway as the European logistics landscape changes. For example:

A changing workforce. "Western Europe is becoming increasingly more prosperous, as it has been for the past 20 years," Bumstead observes.

In addition, the working population in Western Europe is aging, and young professionals are delaying having children, Bumstead says. "The crunch comes in pensions, with an increasing number of older people who want younger people to pay for them," he explains—but there are fewer younger people to shoulder the burden. As a result, migrants from Eastern Europe, Africa, and various war zones—who will have much lower expectations of wages—will play an increasingly important role, resulting in a more diverse workforce in Western Europe.

Transportation. "Transportation is a big issue in Europe," Bumstead says, noting that "road congestion, rail infrastructure, and safety have become political issues" in the U.K. Traffic congestion is an increasing challenge in heavily populated areas, such as Amsterdam, Brussels, London and Paris.

"There has been a major swing in vehicle movements from rail transportation to road," he says. In addition, companies have increased delivery frequency, multiplying vehicle trips, "and there are more cars owned per family, and more people drive farther distances to work."

Governments are moving to address congestion with solutions ranging from charging road tolls to investing in the rail infrastructure. Germany, for example, "is putting big investments in rail lines that run parallel to major highways," Bumstead says.

Other organizations are tackling transportation issues as well. Accenture, for example, is working on a venture that will provide a community of shippers with visibility of loads moving north and south, providing the opportunity to fill empty backhauls and thus help reduce congestion.

The Euro. The advent of a common currency "has created pricing transparency across Europe," Bumstead observes. Before the introduction of the euro, "a lot of people hid behind the fact that they were selling products for different prices in different markets." Use of the euro changes all that. "It has launched a whole new wave of procurement," he explains.

Take the consumer products industry, which typically was a very decentralized, country-based operation. The advent of the euro has given these different operations the ability to recognize that they're being charged different prices for common supplies—such as packaging and raw materials—procured from common vendors.

This opportunity to reexamine pricing, and the advent of electronic auctions, together have created a deflationary effect, according to Bumstead. In addition to increasing competition, the change has resulted in "a lot of local relationships that are now not sustainable," he says.

Another impact of the euro will be a lot more cross-border trade over the next two to five years, Bumstead predicts.

Harmonization doesn't mean standardization. Despite significant advances in establishing a common market, understanding and respecting regional differences remains an important part of doing business in Europe.

"Yes, we are trying to standardize in Europe, but we still have a lot of different countries," Gouda says. While standardization is definitely well underway, change is occurring slowly. Significant differences remain in areas such as regulations, taxes, and duties.

"Europe is still struggling with an identity crisis from customs and regulatory standpoints," observes Stephen Gould. "A score of countries in the EU all have their own governments and trade authority, duty and tariff schemes. An independent international businessman based in Beachwood, Ohio, Gould is an adjunct professor at Case Western University.

Don't expect to be able to replicate the U.S. way of doing business in Europe, Gouda warns. "Europeans are still Europeans. Italian people are different from the Dutch, who are different from the English and the Germans." Companies that are successful in Europe combine Europeanization strategies with taking into account national and regional differences.

Supply chain professionals need to be as vigilant with Europe as an integrated community as they were before, according to Gould. "The continuing integration doesn't mean everything is easier. Quite the contrary," he says.

Just as occurred with NAFTA, the body of regulations, documentation, paperwork and recordkeeping associated with the integration "is changing, and it's monumental," Gould says.

Office Depot Targets Europe for Growth

"We are one of the four largest companies in Europe in terms of sales," reports Rolf van Kaldekerken, president of European Operations for Office Depot Inc. and Viking Direct, Venlo, The Netherlands. Thanks to aggressive growth plans, he expects Office Depot to be number one within the next few years in the office products industry in Europe.

Doing business in Europe is a key strategy for Office Depot, which opened its first European store through a joint venture agreement in France just six years ago. That same year, the company also opened, under the Viking brand, its first Dutch distribution center, located in the Netherlands.

Today, the company has wholly owned European operations in 11 countries, including the U.K., Ireland, France, Belgium, Luxembourg, the Netherlands, Germany, Austria, Italy, Switzerland, and Spain. The company operates in Europe primarily under the Viking brand name, a direct mail and e-commerce operation, and in Eastern Europe under the Office Depot name with licensing agreements.

Logistics a Core Competence

"We probably will never outsource logistics," for it is one of the company's core competencies, van Kaldekerken says. Office Depot relies on its logistics and supply chain operations to differentiate it in a competitive marketplace. "We offer a good combination of aggressive pricing and highest quality of service," which is difficult to find in other companies, he explains.

Take order fill, for example. Office Depot has a target and achieves to ship and deliver 99.5 percent of orders within 24 hours. The company is fanatical about customer service. For example, a customer who calls Office Depot "should never wait longer than six seconds for a live response," van Kaldekerken says. And its returns policies are very customer-focused.

Such high levels of service are made possible by Office Depot's decentralized European logistics operation, which is headed by Wim van Aalst, vice president of supply chain, operating out of the European headquarters in the Netherlands. Each country has its own logistics department. The logistics director in Germany, for example, is responsible for the three logistics centers located there. Inventory control, planning, and quality report to the logistics director, who in turn reports to the Germany country manager as well as to the European vice president of supply chain.

Today, Office Depot has in all of the countries it operates—except Austria—at least one logistics center, with two or three facilities in the larger countries. For example, the company has two warehouses in France, with a third opening before the end of the year. While management of the warehouses is decentralized, the company uses common engineering, processes, and procedures developed by a central engineering function.

The country model may be adapted somewhat in the future, according to van Kaldekerken, who says that establishing a central warehouse to handle B and C products that are distributed throughout Europe "makes a lot of sense."

Technology plays an important role in Office Depot's ability to deliver the goods. The logistics centers use a hybrid of sophisticated automation and manual processes to handle the wide variety of order and product sizes. Office Depot is currently testing two warehouse management systems with RF capabilities. Once a final selection is made, the WMS will be rolled out to all Office Depot European facilities, which use a common system platform.

The company is also moving to implement on-board computers for its private fleet in those areas in the U.K. where it delivers same-day. Private fleets in the U.K. and France are one of the ways Office Depot is addressing traffic congestion. "Congestion is an area where we are investing a lot of time and energy to find the right solution," van Kaldekerken remarks. "Not one model is right for all countries. We have to work out the solution country by country."

Labor is also country-specific, he reports. "You really have to pay attention to the social and cultural differences." Despite the differences, Europeanization is definitely taking hold. Van Kaldekerken's team of direct reports is a prime example. It includes one French, two English, two German, one Belgian, six Dutch, one Italian, one Spanish and now even two American people.

"This mix is good—it demonstrates an international approach, and the ability to communicate in different languages and cultures," he says.

Europe will continue to play an important role for Office Depot, which began serving contract customers through its European Business Service Division in the U.K. in September 2000. Last year, the company launched new contract businesses in Ireland, the Netherlands, and France, expects to open contract operations in Italy this fall and will start Germany in January 2003.

There's more to come, as Office Depot anticipates opening new contract sales operations in at least four to six more European countries in the next 12 to 18 months. In addition, van Kaldekerken says, he expects to expand operations of the Viking brand into Portugal and the Scandinavian countries.

Sara Lee Intimate Apparel Consolidates in Europe

SLIE, Sara Lee's Branded Apparel division in Europe, sells leading brands in intimates, underwear, and hosiery categories. The division is well on its way to consolidating a handful of major continental Europe intimate apparel companies into a single, Europeanized company.

"Just a year ago, we had five or six different companies that were totally separated from an operations and commercial point of view," explains Pierre Berlancourt, vice president of operations for Sara Lee Intimate Apparel Europe. These companies often competed in the marketplace. In July, 2001, Sara Lee launched a program to bring all its intimate apparel entities together as one European company.

Sara Lee Intimate Brands sells a mix of pan-European brands—such as DIM, Playtex, and Wonderbra—and local brands such as Lovable. In addition to supplying a small number of its own stores in Europe, the apparel company sells to wholesalers and retailers that range from independent shops to major department stores and mass market.

The consolidation will require a major restructuring of the company's supply chain and logistics strategies. "Today, logistics is not a competitive lever," Berlancourt observes. "We are much better at designing product, at innovation, aesthetics, color, technical innovations, and satisfying the consumer, than we are at executing logistics."

Recognizing the strategic value of logistics and supply chain management, Sara Lee Intimate Brands last fall embarked on a value chain initiative that will change the way the company does business.

"It is a very big initiative that is cross-functional, cross-divisional, and cross-country," explains Mika Kawachi, project manager for value chain transformation. "The value chain initiative focuses on speed to quickly deliver innovative products that satisfy consumer needs, as well as on reliability to meet our customers' requirements," she says.

Improving speed to market is one of the major priorities for the initiative. Historically, the company—as with many other apparel companies—has introduced two collections, one for the spring/summer, the other for the fall/winter.

"The lead time for production is very long in this industry," according to Kawachi.

"We have to decide today what we'll be selling 12 or 13 months from now," Berlancourt says. Working so far in advance puts Sara Lee "in the gambling business." So the company is working to increase its speed to market in terms of developing and delivering new products and replenishing fast-selling items quickly enough to meet consumer demand.

"We need to reduce the share of uncertainty, and have better mastery of our business by shortening the uncertainty of time," he explains. It's especially important to do so as competition from new and nimble companies increases.

Today, Sara Lee Intimate Apparel has 13 distribution centers within Europe, some much larger than others. "We still have one distribution center per significant brand per country," Berlancourt notes. There are two DCs in France and Italy, for example, and several in Spain.

While the company's vision for its distribution network is still being finalized, Sara Lee is exploring different options, such as a pan-European DC for some lines and local or regional facilities for others.

Whatever shape the final network takes, Berlancourt says, "in the years to come, we should be able to deal with the downstream part of our supply chain just as we do with fresh products: receive an order one day and deliver the next day."

Implementing the value chain initiative is a tremendous task. "It's the major goal of the senior management of Europe," Belancourt says, and a top priority for Jacques Michaud, CEO of Sara Lee Intimate Apparel Europe. Not only is the company consolidating multiple business units into a single entity and repositioning its supply chain base, it is designing new processes and a new way of operating.

Take procurement, which has been centralized using a distributed model enabled by technology. Although the buying department is centralized in France, only two people actually work at headquarters; others remain in their home locations.

"Instead of being generalists, our buyers have become specialists," Berlancourt explains. For example, while buyers in the U.K once bought everything from fabric and Scotch tape specifically for operations in England, today they may buy certain categories of products—such as laces, embroidery, and cotton fabric—for all lines, while buyers in Spain may buy notions for all lines. Sara Lee benefits from increased economies of scale and greater buying power, becoming a much more important customer to its suppliers.

Instead of six companies buying for themselves, "we are now dealing with our suppliers with one voice for the whole of Europe," Berlancourt says.

Sara Lee's distribution and logistics strategies are still being finalized. The company expects that execution of the strategy will take a year or two. "We're creating a new company out of many different bricks," Berlancourt says.

It may well be a model for doing business in Europe in the future. "It's not just a cross-functional approach," he continues. "It's a multi-country, multi-cultural, and multi-brand approach" that Sara Lee Intimate Brands expects will provide significant competitive advantage in the years to come.